Mortgage Settlements

I have read contradictory information about mortgages settlements in Spain, is it possible to give the keys of a property to the bank or not?

Yes, it is definitively possible and actually it´s something that´s often done.

What are the rules for the settlements?

There are no rules and rather there´s a big gap in the Law. The settlements are not banned by Law, yet they are not formally admitted either.

Why is it like this?

When there are only a few months for the year 2016 to get to an end, the Spanish legislator in spite of its repeated promises has not yet amended comprehensively the mortgages regulation.

For the last five years the mortgagees and the banks have been blaming each other of the high number of defaults in the mortgages of second residences in Spain.

The ultimate reasons for the previously mention dispute goes back some years. The construction bubble of the mid 2000s years burst in 2009, and provoked:

a) the drastic drop in the value of the real estate market in Spain, including obviously the mortgaged properties;

b) a reduce in the families´ income; c) a complete re-structuring of the Spanish financial system, with all the “cajas” (local saving banks) dissolved and their assets and liabilities allocated or sold to the banks.

This was an explosive mix of circumstances that shook the real estate market in Spain and raised all alarms.

And what are the abusive clauses?

The same financial distress mentioned above left uncover a myriad of irregularities agreed in the mortgage agreements signed in Spain between 2004 and 2009.

These irregularities were concealed in the agreements and hence virtually forced  the borrowers in the form of: abusive clauses (mainly the now illegal floor clause), interest rates and references detrimental only for the borrowers (specifically the old “IRPH cajas”, now called “IRPH entidades”), clauses by which the lender could foreclose the mortgage and start the repossession process with only one month of default on the mortgage, valuations overinflated, etc.

As early as 2010, when the first symptoms of all the previous started to make the headlines, all the actors in this state of things turned to the Government requesting a prompt solution.

The banks wanted clear regulations, and specifically an indication that the more strict rules pertaining the mortgage system would apply, so they would be able to request full payment to the mortgagees, as agreed in the agreements, or else they could chase them for the shortfall.

The borrowers, because their properties mortgaged were given an unrealistic (very high) valuation and now wouldn´t sell for one third of the value given in the appraisals.

The Spanish Law Firms, both of borrowers and the banks, to have a set of rules with which give proper advice to their clients.

And last, but not least, the EU authorities did requested the Spanish State to “completely change the rules of the mortgage foreclosing and repossessions”.

So what´s the current scenario?

The current Spanish Government is in office only provisionally after the last elections gave as a result a hung Parliament.

General elections might be called again and it is very unlikely that the Government will try to pass any bill related to this matter soon.

To this fact, it is necessary to add that the party behind the Government in office (PP or People´s Party) is heavily indebted with all the major Spanish banks, and it is quite unlikely that will pass any bill that damage the banks´ financials.

Under these circumstances and all the above, the state of things somehow evolves steadily but visibly, led by many Higher Courts rules, which have uncovered and punished the banks´ abuses in the mortgage agreements of many years.

The borrowers are getting support for their cases from the Judges in the main two issues at dispute:

The floor clause

Virtually all mortgage agreements signed in the 2000s had a floor clause, impeding the borrowers to benefit for the reduction of interest rate´s references.

The said agreements did not set a maximum (or cap) to which the references (euribor, other) could jump to; yet the banks included in the mortgages almost by default a floor clause.

According to this clause, even if the interest were reduced (as it did eventually happen) the interest to apply to the mortgage will remain as set by the floor clauses.

These clauses were customarily in levels of 4 to 6 %.

The previous scenario has been fully uncovered by the Judges and banned hereafter.

The banks did try to keep the floor clauses in the contracts using feeble arguments.

However, a rule passed by the Spanish Supreme Court by June 2013 demolished the banks´ arguments. It said that the clauses were not admissible, as provoked a notorious imbalance in the rights between the intervening parties.

Also that it was irrelevant that the mortgagees agreed the clause – they simple were not aware of that clause as it was usually “concealed amongst a myriad of other clauses and information”, as precisely mentions the Supreme Court rule.

The last straw against the now infamous floor clause has been a recent decision of the financial authorities region of Asturias, in Northern Spain.

They started issuing fines to all banks which had entered a floor clause in a mortgage agreement – precisely by issuing a 8,000 euros fine for every mortgage contract in which a bank has entered a floor clause.

The IRPH as interest rate reference

One of the measures the Spanish legislator issued in the Law reforms of 2012 / 2013 was to substitute the old IRPH by a new IRPH, named “IRPH financial entities”.

The IRPH was a reference used in Spain by the saving banks (the local cajas). It had the credit of being more stable, and the banks used to recommend it, and the borrowers preferred it too, because it oscillated less than the euribor.

However, with the interest rates in historical minimums the mortgagees wanted to pay less every month, and asked for lower references.

In an attempt to content both parties, the legislator abolished the old IRPH and created the new IRPH as an ideal solution.

For those with the old IRPH in their mortgages (none of which were offered the euribor), an automatic change will replace it for the new IRPH.

However, this change was not what the borrowers wanted – the new IRPH is still way higher than the euribor, plus is set monthly by an agreement made by the same banks that lend the funds.

This circumstance was taken to Court by those with the new IRPH in their mortgages when the banks flatly rejected to substitute it with the euribor.

The result has been virtually unanimous: the Judges have considered the new IRPH abusive and illegal and are granting to the claimants for it to be changed by the euribor, at the banks expense.

The banks, if reluctantly, have made the changes.

So the current situation in relation with the mortgages has changed drastically compared with the late 2000s.

The borrowers can now request from the bank to take off all the abusive clauses in the agreement.

The mortgages granted during the real estate bubble are being stripped off the abusive (and even unjustifiable) clauses. And the new ones agreed do not contain illicit terms and conditions for the borrowers.

So is it as simple as calling my banker and telling him that I want to give my keys back?

Not really, as the banks normally do not accept the client´s requests if there is negative equity.

The banks are still reluctant to settle – i.e. to accept the property keys back as full repayment of the outstanding capital of the mortgage – with those borrowers who cannot carry on paying the mortgage every month.

The main point is that the value of the properties have go down so much that virtually all properties mortgaged in the 2000s are currently in negative equity.

How can a Spanish solicitor help me?

Basing his cases in some precedents passed by the Supreme Court, the borrower´s solicitors are forcing the banks to accept the properties giving it the values they did have when mortgaged.

In Spain it is mandatory to make a full appraisal of the property at the time of the mortgage. This value is entered in the mortgage deeds and it is the figure upon which the LTV is calculated.

The Supreme Court precedents said that this value was accepted by the banks and also that these banks lent to their clients (or should have done) with enough margins as to prevent drastic changes in market value.

If you have a mortgage in Spain and would like to discuss your circumstances, please don´t hesitate to contact us for a no-obligation consultation.

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